Demand-led growth decomposition: an empirical investigation of the Brazilian slowdown in the 2010s

Abstract

Abstract The empirical investigation on countries' long-term growth usually relies on growth accounting methods, which are based on a supply-led approach, where factors accumulation are the main countries' growth constraints. This approach, however, ignores the importance of effective demand in explaining the long-term dynamics. Conversely, Keynesians stress the centrality of effective demand to explain why some countries present high growth rates for prolonged periods and others do not. They account for different views on the determinants of demand growth, such as exports dynamics, income distribution and public investment. The aim of the paper is twofold. Firstly, it extends the SDA method – a method that allows us to identify sources of changes in input–output matrices – to account for endogenous consumption and import-substitution impacts, and, secondly, it applies this method to understand the Brazilian slowdown in the 2010s. Based on a Miyazawa–Leontief framework, it is possible to identify the importance of each of the demand factors in explaining countries' growth, considering both the autonomous sources of demand and their potential to spread through the economy via their multiplier effects. The application of this extension to investigate the Brazilian slowdown in the 2010s shows the importance of natural resource exports, public investment and absorption of domestic demand in different sub-periods. Based on these findings, we discuss the possibility of Brazil to restore its growth potential through specific demand stimulus, such as infrastructure investments.